Market Anticipations of Monetary Policy Actions · The recent trend in monetary policy has been...

JULY/AUGUST 2002 65

Market Anticipationsof Monetary PolicyActionsWilliam Poole, Robert H. Rasche, and Daniel L. Thornton

The purpose of this paper is to investigate theextent to which market participants anticipateFederal Reserve policy actions. The topic is

central to macroeconomics. Since the early 1970stheorists have emphasized that a complete modelof the economy requires a full specification of thebehavior of policymakers. Otherwise, there is noway to model the expectations upon which privateagents base their decisions.

The recent trend in monetary policy has beentoward greater transparency, accountability, andcredibility. This trend is largely explained by twoideas. First, the economics profession has acceptedthe proposition that monetary policy is the funda-mental determinant of inflation in the long run.1Second, central bank credibility and clear marketexpectations about monetary policy are critical topolicy success.2

The key theoretical development in this contextwas the application of rational expectations tomacroeconomics and the statement of the famousLucas critique. Lucas (1976) argued that the economyand policymakers are interdependent. Specifically,the public forms expectations of the dynamic feed-back rule that policymakers follow to implementpolicy. This line of argument led naturally and imme-diately to the distinction between expected andsurprise policy actions and a number of papersexploring their different effects on the economy.3For example, the more transparent the central bank,the less likely that it will be able to institute a sur-prise inflation to temporarily raise output growth.

Our purpose is not to add to the extensive theo-retical literature, but instead to document in consid-erable detail the extent to which U.S. monetarypolicy has become increasingly open and trans-

parent. The trend toward greater transparency hasbeen especially evident in recent years.4 In 1994,the FOMC began the practice of announcing policyactions immediately upon making them, and in1995 the practice was formally adopted.5 SinceAugust 1997 the FOMC has included a numericvalue of the “intended federal funds rate” in eachdirective. Since May 1999 a press statement hasbeen released at the conclusion of every meeting.These press statements initially included a numericvalue for the “intended federal funds rate” and astatement of the “policy bias.”

In February 2000 the FOMC replaced the “policybias” in the Directive that had been used sinceFebruary 1983 with a statement of the “balance ofrisks.”6 In this statement the FOMC indicates itsbeliefs about how the risks of heightened inflationpressure and economic weakness are balanced overthe foreseeable future. The new language was notintended to indicate the likely direction or timingof future policy moves.

These moves toward greater openness andtransparency should have increased the ability ofmarkets to anticipate policy actions. Poole andRasche (2000) and Kuttner (2001) used data fromthe federal funds futures market to estimate theextent to which the market has anticipated the Fed’sactions. While their methodologies differ slightly,

1 There is a continuing debate, however, about exactly how centralbanks control the long-run inflation rate and the relative importanceof money. For further discussion, see McCallum (2001).

2 In the final analysis, credibility is earned—central banks will be knownby their actions, not by their words. The Swiss National Bank and theBundesbank had considerable credibility because they kept the infla-tion rate low. See Meyer (2001) for a discussion of the need to earncredibility.

3 A number of arguments have been advanced for why only surprisepolicy actions matter. Recently, Woodford (2001) presented argumentsagainst several of these propositions. Indeed, he shows that in modelswith forward-looking expectations, what matters is the market’s expec-tation of future policy. The remaining argument against expectedpolicy having real effects occurs if prices adjust very rapidly to expectedpolicy actions. In such an environment, policymakers would be unableto change the stock of real money and, consequently, unable to affectany real variable. For a recent attempt to differentiate empiricallybetween the effects of expected and unexpected policy actions, seeHoover and Jorda (2001).

4 In its landmark Freedom of Information Act case (Merrill vs. FOMC)that was argued before the U. S. Supreme Court in 1976, the Fed vigor-ously defended the need for secrecy. See Goodfriend (1986) for adiscussion of the Merrill case and the Fed’s arguments.

5 For a detailed history of the Fed’s disclosure practice, see Rasche (2001).

6 See Thornton and Wheelock (2000) for a detailed analysis of the policybias statement.

William Poole is the president, Robert H. Rasche is a senior vicepresident and director of research, and Daniel L. Thornton is a vicepresident and economic advisor at the Federal Reserve Bank of St. Louis.Kathy Cosgrove and Charles Hokayem provided research assistance.

© 2002, The Federal Reserve Bank of St. Louis.

both looked at the reaction of the federal fundsfutures rate on days when the Fed changed the fundsrate target; in this way, they estimated the extent towhich the market was surprised by Fed actions. Theexpected target change is obtained by subtractingthis estimate from the actual target change. Thesemeasures were then used to estimate the responseof market rates to unexpected changes in policy.Both analyses find that Treasury rates respondedsignificantly to unexpected target changes, but notto expected target changes.

This paper extends this literature in severalimportant directions. First, because this methodologyrequires that market participants know that the Fedhas changed the funds rate target, we perform theanalysis separately over the two periods: pre-1994and post-1993. (Pre-1994 refers to the periodbefore the February 4, 1994, FOMC meeting; post-1993 refers to the period after that meeting.) As ofFebruary 4, 1994, there is no doubt that the markethas been aware each time the target was changedbecause each change has been announced. Before1994 the market’s knowledge of Fed actions cannotbe taken for granted. Consequently, we undertake adetailed analysis of what the market knew about Fedpolicy actions before 1994 to determine instanceswhen market participants were and were not awarethat the target had changed.

Second, we show that the Poole/Rasche andKuttner methodology eliminates part, but not all,of the measurement error associated with identify-ing unexpected changes in the funds rate target.Failure to account for the remaining source of mea-surement error results in a downward bias in theestimate of the response of the Treasury rates tounexpected target changes. We implement an errors-in-variables estimator to correct for this bias.

Third, we attempt to identify the extent towhich market participants were surprised by theFed’s inaction. That is, we identify dates when themarket expected the Fed to act but no action wastaken. This is particularly relevant for the post-1993period. Given the FOMC’s practice since 1993 ofchanging the target primarily at regularly scheduledmeetings, it is reasonable to assume that there mayhave been instances when the market was expectingan action that the FOMC did not take. The absenceof action may have prompted market participantsto revise their expectation for the future funds rate.

Fourth, we investigate how far in advance themarket appeared to correctly anticipate a policyaction. The Poole/Rasche and Kuttner methodology

indicates only whether the market anticipated theFed’s action at the time the action was taken; it doesnot provide information about how far in advancethe market expected the action. This measurementrequired a detailed analysis of what the marketexpected and the behavior of longer-term federalfunds futures rates.

Finally, we provide additional evidence thatthe recent trend toward greater transparency hassignificantly increased market participants’ abilityto anticipate Fed actions.

IDENTIFYING UNEXPECTED MONETARYPOLICY ACTIONS

One problem in estimating the response of theeconomy to exogenous policy actions of the Fed hasbeen that it has been difficult to isolate a variablethat measures such actions. The search for a singlemeasure of exogenous Fed policy actions has beenhampered by the fact that the Fed has changed itsemphasis in conducting monetary policy over theyears.

The practice of changing operating procedures,and in some instances changing policy objectives,combined with the lack of transparency about eitherthe Fed’s objectives or its operating procedure makesit very difficult to isolate one variable that reflectsFed policy actions. It is hardly surprising that a num-ber of variables—growth rates of monetary andreserve aggregates, changes in the discount rate,and short-term interest rates, particularly the over-night federal funds rate—have been used as mea-sures of Fed policy actions.

Knowing the Fed’s policy instrument is animportant element for assessing the effect of mone-tary policy actions, but it is not the only element. Ifmarkets are efficient, anticipated policy actions arealready reflected in economic variables—marketsrespond only to unexpected policy actions. To iden-tify the effect of policy actions on the economy, theobserved policy instrument must be partitionedinto its expected and unexpected components.Failure to distinguish between expected and unex-pected policy actions gives rise to a measurementproblem, which biases downward the estimatedresponse of economic variables to a change in thepolicy instrument. To correctly assess the impact ofpolicy actions, then, the policy instrument must beknown, observed, and partitioned into its expectedand unexpected components.

There is little difficulty in identifying policy

66 JULY/AUGUST 2002

Poole, Rasche, Thornton R E V I E W

actions since the late 1980s. For one thing, the Fedhas explicitly targeted the federal funds rate duringthis period and there is evidence that the marketwas aware that the Fed targeted the funds rate asearly as 1989. In addition, in October 1988 theChicago Board of Trade began trading federal fundsfutures contracts. A federal funds futures contractis a bet on the average effective federal funds ratefor the month in which the contract matures. Conse-quently, the federal funds futures rate reflects themarket’s expectation for the average level of thefederal funds rate for that month. In this environ-ment, the federal funds futures rate is a nearly idealmeasure of the market’s expectation of Fed policy.To illustrate, let ffft

h denote the rate on the h-monthfederal funds futures contract on day t. Note that

(1) ,

where ffih denotes the federal funds rate on day i of

the hth month, Et denotes the expectation on dayt, and m denotes the number of days in the month.

Now assume that the Fed is targeting the federalfunds rate and that the funds rate stays very closeto the target, i.e.,

(2) ,

where fft* denotes the Fed’s target for the federal

funds rate on day t and ηt denotes a mean zero, butnot necessarily i.i.d., random variable.7 Substituting(2) into (1) yields

(3) .8

On day t, the change in the h-month federalfunds futures rate would be

(4) .

Suppose that on day t there is a change in theintended funds rate that is expected to persist forh months or longer. If market participants correctlyanticipate both the timing and the magnitude ofthe Fed’s action, the h-month-ahead federal fundsfutures rate would not respond to the action, i.e.,∆ffft

h=0. The change in the h-month-ahead federalfunds futures rate on days when the market knowsthat the Fed has changed its funds rate target is ameasure of the unexpected change in the target, solong as the new target is expected to persist for theterm of the futures contract. The expected targetchange can be calculated by subtracting this numberfrom the actual target change.

Poole/Rasche and Kuttner use this procedure

∆ fff m E ff E ffth

t ih

im

t ih≡ ∑ −= −( ) ( )1 1 1/ * *

fff m E ffth

t ih

im≡ ∑ =( )1 1/ *

ff fft t t= +* η

fff m E ffth

t ih

im≡ ∑ =( )1 1/

to identify unexpected policy actions. Poole andRasche use the change in the 1-month federal fundsfutures rate on the day the target was changed. Onthe first day of the month fff 1

t–1 is replaced by thefutures rate on the 2-month contract for the lastday of the previous month.

In contrast, Kuttner estimates the unexpectedtarget change using the current month’s futuresrate contract. Specifically, Kuttner’s estimate of theunexpected target change is

(5) ,

where ffft0 is the value of the current month’s federal

funds futures rate on the t th day of the month andm is the number of days in the month. On the firstday of the month, fff 0

t–1 is replaced by the futuresrate on the 1-month contract on the last day of theprevious month. On the last three days of the month,Kuttner uses the Poole/Rasche measure of the unex-pected target change.

Knowledge of Fed Actions

These measures presume that market partici-pants are aware of the target change. If the marketparticipants are unaware that the target has changed,expectations for the funds rate would not necessar-ily reflect expectations for the Fed’s policy instru-ment. Even if market participants were aware thatthe Fed had taken some policy action, evidenced,for example, by a change in the discount rate, thechange in the federal funds futures rate would notnecessarily reflect the “unexpected change in thefunds rate target.”

Likewise, if market participants do not knowthat the target has changed on a particular day,that day’s change in the federal funds futures ratecould not measure the unexpected change in thefunds rate target. Indeed, on such days the changein the futures rate would normally be relativelysmall, which might be interpreted as the markethaving expected the target change. In truth, how-ever, market participants would be simply unawarethat the target had changed.

After 1994, knowledge of FOMC actions is notan issue. As previously stated, at its February 4, 1994,

∆ffm

m tfff ffft

ut t

* ≡−

− −( )01

0

JULY/AUGUST 2002 67

7 There is some well-documented persistence in deviations of the fundsrate from the funds rate target. For example, see Taylor (2001).

8 This and subsequent analyses ignore the possibility of a small premiumin the futures market, documented by Robertson and Thornton (1997),because any such premium is so small that its existence would havea negligible impact.

FEDERAL RESERVE BANK OF ST. LOUIS Poole, Rasche, Thornton

meeting, the FOMC began the practice of announc-ing target changes immediately.9 Knowledge oftarget changes before 1994, when target changeswere not announced, is problematic. The processof knowing when the target was changed was furthercomplicated by the fact that during this period mosttarget changes were made between, rather than at,FOMC meetings. Furthermore, until late 1989 (whenthe Fed appears to have adopted the practice ofchanging the target only in multiples of 25 basispoints), target changes of various amounts smallerthan 25 basis points were common.

THE MARKET REACTION TO UNEXPECTED TARGET CHANGES—POST-1993

In this section we estimate the response ofmarket rates to unanticipated changes in the fundsrate target. We begin by analyzing the post-1993period. The policy action on February 4, 1994, isexcluded from our analysis because this is the firsttime that the FOMC announced its decision. Sincethere was no information prior to the conclusionof that meeting to indicate that such an announce-ment would be forthcoming, market reaction wasconditioned on less information than at subsequentmeetings.

To estimate the response of various Treasuryrates to changes in the funds rate target, Poole/Rasche and Kuttner estimated the equation

(6) ,

where ∆it denotes the change in the selectedTreasury rate and ∆fft

*e denotes the expected changein the funds rate target, i.e., ∆fft

*e=∆fft*– ∆fft

*u.Ordinary least-squares (OLS) estimates of β1

and β2 are biased because the measures of the unex-pected target change suffer from measurement error.The measurement error arises because each daymarkets process information that comes in variousforms. While special attention is paid to headlinenews—reports of major government statistics,announcements of funds rate target changes, etc.—market participants process information from avariety of other sources that are less easily identified.Hence, federal funds futures rates change even ondays when there is no headline news or a targetchange. Such ambient news is included in the Poole/Rasche and Kuttner measures of the unexpectedchange in the funds rate target.

We adjust for the errors-in-variable bias using aclassic econometric approach. It is convenient to

∆ ∆ ∆i ff fft te

tu

t= + + +α β β ε1 2* *

rewrite (6) so there is only one variable that is mea-sured with error:

(7) ,

which simplifies to

(8) .

Classic Errors-in-Variables Model

Errors-in-variables bias arises when one of thevariables is measured with error. To illustrate theproblem and the corresponding errors-in-variablesestimation, assume that

(9) ,

where ∆fft*um is an estimate of the true unexpected

change in the funds rate target and ut is a randommeasurement error that is uncorrelated with ∆fft

*u.Substituting (9) into (8) yields

(10)

It is clear from (10) that ∆fft*um is negatively corre-

lated with ϖt, which will bias the estimate of (β2 – β1)down. The classic errors-in-variables estimatormakes use of the assumptions that Eut=Eεt=0 andEutεt=0. Under these assumptions, the covariancebetween (β2– β1)∆fft

*um and ϖt is –(β2– β1)σu2, where

σu2 is the variance of the measurement error.10

Identifying Ambient Variation in theFutures Rate

The application of the classic errors-in-variablesestimation technique requires a measure of thevariance of the shock associated with the ambientnews. We accomplish this by identifying all of thepolicy events since 1994. A policy event is either ameeting of the FOMC or an intermeeting targetchange. During this period all but four of the targetchanges occurred at regularly scheduled FOMCmeetings. There were 62 such events from March1994 through May 2001. We then read the front pageand the Credit Markets column of the Wall StreetJournal (WSJ ) at least two days before each of theseevents to infer what the market anticipated wouldhappen on “event days.”

∆ ∆ ∆

∆ ∆

i ff ff u

ff ff

t t tum

t t

t tum

t

= + + − − +

= + + − +

α β β β ε

α β β β ϖ1 2 1

1 2 1

* *

* *

( )

( ) .

∆ ∆ff ff utum

tu

t* *= +

∆ ∆ ∆i ff fft t tu

t= + + − +α β β β ε1 2 1* *( )

∆ ∆ ∆ ∆i ff ff fft t tu

tu

t= + − + +α β β ε1 2( )* * *

68 JULY/AUGUST 2002

9 The FOMC formally adopted this practice as a procedure at its January-February 1995 meeting.

10 For more details, see Johnston (1963, pp. 168-70).


On meeting days when the target was notchanged, we concluded that the market anticipatedthat no action would be taken if the commentarysuggested that market analysts overwhelminglybelieved that no action would be taken. We inferredthat the market anticipated no action when the WSJreported there was a “consensus” or “unanimity”among market analysts.

When the funds rate target was changed, werequired market analysts to correctly anticipatethe magnitude of the target change. In many casesthe WSJ reported the results of a survey. In theseinstances, we inferred that the market correctlyanticipated the FOMC’s action if more than three-fourths of the survey respondents correctly predictedthe action.

This procedure resulted in the contingencytable shown in Table 1. The dates for each of thesegroups and the corresponding Poole/Rasche andKuttner shock measures are presented in Table 2.11

Of the 62 events since March 1994, we concludethe market fully anticipated 44. For most of theseevents the FOMC did not change the funds rate. Ononly four occasions when there was no target changedid we conclude the market was surprised. The targetwas changed 24 times during this period. We con-clude market participants were surprised on 14 ofthese occasions.

Our classification using the WSJ is generallysupported by the shock measure. There are only twooccasions when the Poole/Rasche shock measurewas larger than 5 basis points when our readingof the WSJ indicated that the market expected theFOMC’s action. On both of these occasions, the targetwas changed. Moreover, when our reading of theWSJ indicated that the market was surprised by theaction, the Poole/Rasche shock measure is largerthan 5 basis points on all but three occasions. Marketparticipants appear to have been surprised by allfour of the intermeeting target changes. Indeed,three of the four largest shocks by either measureoccurred on these days. This suggests that, whilethe market may be able to anticipate the directionand size of the next target change, predicting thetiming of an action is difficult unless the FOMC fol-lows a rule, such as only adjusting the funds ratetarget at regularly scheduled meetings.

The Results

The variance of the observed change in the 1-month federal funds futures rate for the 44 eventsin the second row of Table 1 is our estimate of σu

2,the variance of the measurement error. OLS estimates

and estimates obtained using a classic errors-in-variables estimation technique (EV) are presented inTables 3 and 4 for the post-1993 period using thePoole/Rasche and Kuttner shocks, respectively. Notsurprisingly, the OLS estimates suffer from errors-in-variables bias. In all cases, EV estimates of β2 arelarger than the corresponding OLS estimates. Theresponse of these rates to target shocks is larger withthe Poole/Rasche measure than with the Kuttnermeasure, but the differences are generally small.Figure 1, which shows the two measures of targetshocks, reveals that there is close correspondencebetween these measures.12 Hence, it is hardly sur-prising that these measures yield very similar results.As a result, only the Poole/Rasche shock will bepresented in the remainder of the paper.

Do Markets Respond to ExpectedTarget Changes?

One unexpected result is the finding that the3-month rate responds significantly to actual targetchanges, suggesting that the market responds toexpected changes. The estimated coefficient on thetarget change in the regression for the 3-month rateis statistically significant at the 5 percent level. Thisresult is at odds with the efficient markets hypothesisand with Poole/Rasche and Kuttner, who foundthat markets did not respond to anticipated targetchanges. It is also at odds with our findings (pre-sented in the next section) for the pre-1994 period.

Kuttner (2001) reports a similar result when heused monthly average data. Specifically, he foundthat both the 3- and 6-month T-bill rates respondedsignificantly to his measure of the surprise target

JULY/AUGUST 2002 69

11 As Kuttner (2001) has noted, the change on October 15, 1998, wasannounced at 3:15 p.m. Eastern time, after the markets closed. Conse-quently, for the purpose of the empirical analysis, this change is datedas October 16.

12 The simple correlation between these measures is 0.98.


Contingency Table of Anticipated andUnanticipated Events Obtained from theWall Street Journal

No target Target change change Total

Surprise 4 14 18

No surprise 34 10 44

Total 38 24 62

Table 1

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Dates and Poole/Rasche and Kuttner ShockMeasures Corresponding to Table 1

Figure reference Date Poole/Rasche Kuttner number

Surprise/no target change

9/27/94 –0.08 –0.20 Figure 7

12/20/94 –0.11 –0.17 Figure A1-A

9/24/96 –0.13 –0.12 Figure 6

5/20/97 –0.09 –0.11 Figure A1-B

Surprise/target change

3/22/94 –0.04 –0.03 Figure 4

4/18/94* 0.10 0.10 Figure 2

5/17/94 0.05 0.13 Figure 3

8/16/94 0.10 0.14 Figure A2-A

11/15/94 0.09 0.14 Figure A2-B

7/06/95 –0.07 –0.01 Figure A2-C

12/19/95 –0.11 –0.10 Figure A2-D

1/31/96 –0.07 –0.07 Figure A2-E

10/16/98* –0.20 –0.26 Figure A2-F

11/17/98 –0.06 –0.06 Figure A2-G

11/16/99 0.08 0.09 Figure A2-H

1/03/01* –0.29 –0.38 Figure A2-I

3/20/01 0.03 0.06 Figure 5

4/18/01* –0.42 –0.43 Figure A2-J

No surprise/no target change

7/06/94 –0.02 –0.05 NA

3/28/95 0.00 0.10 NA

5/23/95 0.01 0.00 NA

8/22/95 0.02 0.00 NA

9/26/95 0.04 0.00 NA

11/15/95 0.01 0.06 NA

3/26/96 0.01 –0.03 NA

5/21/96 0.01 0.00 NA

7/03/96 –0.05 –0.05 NA

8/20/96 –0.01 –0.04 NA

11/13/96 0.01 0.00 NA

12/17/96 0.00 0.10 NA

Table 2

Figure reference Date Poole/Rasche Kuttner number

No surprise/no target change cont’d

2/05/97 –0.02 –0.03 NA

7/02/97 –0.01 –0.02 NA

8/19/97 0.01 –0.01 NA

9/30/97 0.00 0.00 NA

11/12/97 –0.02 –0.04 NA

12/16/97 –0.01 –0.01 NA

2/04/98 0.01 0.00 NA

3/31/98 0.00 0.00 NA

5/19/98 –0.02 –0.03 NA

7/01/98 –0.01 –0.01 NA

8/19/98 0.00 0.00 NA

12/22/98 0.00 0.00 NA

2/03/99 –0.01 0.00 NA

3/30/99 0.00 0.00 NA

5/18/99 –0.01 –0.02 NA

10/05/99 0.00 –0.04 NA

12/21/99 0.00 0.03 NA

6/28/00 –0.02 –0.02 NA

8/22/00 0.00 0.00 NA

10/03/00 0.00 0.00 NA

11/15/00 0.00 0.00 NA

12/19/00 0.05 0.05 NA

No surprise/target change

2/01/95 0.02 0.05 Figure A3-A

3/25/97 0.04 0.03 Figure A3-B

9/29/98 0.06 0.06 Figure A3-C

6/30/99 –0.04 –0.04 Figure 9

8/24/99 0.03 0.02 Figure 10

2/02/00 –0.04 –0.05 Figure A3-D

3/21/00 –0.01 –0.03 Figure 8

5/16/00 0.04 0.05 Figure A3-E

1/31/01 0.00 0.00 Figure A3-F

5/15/01 –0.07 –0.08 Figure A3-G

NOTE: *Indicates an intermeeting target change.

change when monthly data were used. He interpretsthis result as being consistent with the expectationstheory of the term structure, suggesting that “theanticipated rate changes are associated with expec-tations of further actions in subsequent months.”13

While market participants may revise their expec-tation of future rate changes in response to an un-anticipated target change, we do not believe thatthey would do so in response to an expected targetchange. Consequently, we suspect there is anotherexplanation for this result.

One possible explanation comes from notingthat before 1994 there were relatively few occasionswhen the funds rate target and the discount ratewere changed simultaneously. After 1994 things arevery different. Of the 24 target changes consideredin the post-1993 period, 16 were accompanied bya change in the discount rate. Thornton (1996)found that the 3-month T-bill rate responded differ-ently to target changes when the discount rate was

JULY/AUGUST 2002 71


OLS and EV Estimates of the Response of Treasury Rates to Target Surprises Using thePoole/Rasche Measure (Post-1993)

OLS EV

Rate α β1 β2 R– 2/se α β1 β2 R

– 2/se

∆tb3 –0.112 (0.01) 0.083 (0.03) 0.757 (0.24) 0.600/0.086 –0.122 (0.01) 0.071 (0.03) 0.808 (0.28) 0.597/0.086

∆tb6 –0.035 (0.01) 0.056 (0.03) 0.586 (0.18) 0.531/0.074 –0.035 (0.01) 0.045 (0.04) 0.635 (0.20) 0.528/0.074

∆tb12 –0.035 (0.01) 0.034 (0.03) 0.502 (0.17) 0.384/0.080 –0.035 (0.01) 0.024 (0.03) 0.546 (0.19) 0.381/0.080

∆T2yr –0.027 (0.02) 0.023 (0.04) 0.334 (0.18) 0.115/0.096 –0.027 (0.02) 0.015 (0.04) 0.364 (0.20) 0.114/0.096

∆T5yr –0.029 (0.02) –0.023 (0.04) 0.159 (0.22) 0.000/0.106 –0.028 (0.02) –0.028 (0.04) 0.182 (0.23) 0.000/0.106

∆T10yr 0.025 (0.02) –0.049 (0.04) 0.014 (0.21) 0.000/0.098 –0.024 (0.02) –0.052 (0.04) 0.027 (0.22) 0.000/0.098

∆T30yr –0.029 (0.01) –0.048 (0.03) –0.083 (0.13) 0.003/0.073 –0.029 (0.01) –0.050 (0.04) –0.075 (0.13) 0.003/0.073

NOTE: Estimated standard errors are in parentheses.


t= + + − +α β β β ε1 2 1* *( )

Table 3

OLS and EV Estimates of the Response of Treasury Rates to Target Surprises Using the KuttnerMeasure (Post-1993)

OLS EV


– 2/se

∆tb3 –0.017 (0.01) 0.077 (0.03) 0.662 (0.20) 0.607/0.085 –0.018 (0.01) 0.065 (0.04) 0.706 (0.23) 0.604/0.085

∆tb6 –0.040 (0.01) 0.059 (0.04) 0.489 (0.15) 0.506/0.076 –0.040 (0.01) 0.048 (0.04) 0.528 (0.17) 0.502/0.076

∆tb12 –0.041 (0.01) 0.044 (0.03) 0.392 (0.16) 0.332/0.083 –0.041 (0.02) 0.034 (0.04) 0.426 (0.17) 0.329/0.084

∆T2yr –0.034 (0.02) 0.046 (0.04) 0.204 (0.17) 0.053/0.010 –0.034 (0.02) 0.041 (0.05) 0.224 (0.19) 0.052/0.100

∆T5yr –0.035 (0.02) 0.008 (0.04) 0.027 (0.21) 0.000/0.108 –0.035 (0.02) 0.005 (0.04) 0.038 (0.23) 0.000/0.108

∆T10yr –0.029 (0.02) –0.021 (0.04) –0.087 (0.20) 0.000/0.097 –0.029 (0.02) –0.022 (0.04) –0.083 (0.21) 0.000/0.097

∆T30yr –0.032 (0.01) –0.028 (0.03) –0.142 (0.11) 0.035/0.072 –0.031 (0.01) –0.029 (0.03) –0.141 (0.12) 0.035/0.072



t= + + − +α β β β ε1 2 1* *( )

Table 4

13 Kuttner (2001, p. 541).

changed. Discount rate changes appear to have anindependent effect on market rates. Hence, it ispossible that the significant response to expectedtarget changes (reported in Tables 3 and 4) is due tothe fact that, on some occasions, the Fed providedadditional information by simultaneously changingthe discount rate.

To investigate this possibility, the equations werereestimated with target changes partitioned intothose when the discount rate was changed andthose when it was not. Specifically, the equation

(11)

was estimated.EV estimates of equation (11) are reported in

Table 5. They suggest that changes in the fundsrate target that are accompanied by changes in thediscount rate provide additional (unanticipated)information. In the absence of such additionalinformation, the market does not respond signifi-cantly to expected target changes. The market onlyresponds to “expected” target changes when newinformation is simultaneously provided. In this case,

∆ ∆ ∆ ∆ ∆ ∆i ff dr ff no dr fft t t tu

t= + + ′ + +α β β β ε1 1 3* * *| |

the new information comes in the form of a discountrate change.

THE MARKET REACTION TO UNEXPECTED TARGET CHANGES—PRE-1994

To apply the Poole/Rasche and Kuttner method-ology to target changes before 1994, we must firstidentify whether the market realized on the day ofthe event that a target change had occurred. To deter-mine the market’s knowledge of a target change, weread the front page and the Credit Markets columnfrom the WSJ for at least two days after each changein the funds rate target. This procedure is compli-cated by the fact that there is some difference of opin-ion about when the funds rate target was changed.We started with a widely used series of target changesreported by the Federal Reserve Bank of New York.Recently, however, Thornton and Wheelock (2000)presented an alternative series prepared by the staffof the FOMC Secretariat’s office. Before 1989 theseseries sometimes differ in the dating and magnitudeof Fed actions. The dates considered are the union

72 JULY/AUGUST 2002


–0.5

–0.4

–0.3

–0.2

–0.1

0

0.1

0.2

0.3

0.4

0.5

–0.5 –0.4 –0.3 –0.2 –0.1 0 0.1 0.2 0.3 0.4 0.5

Kut

tner

Mea

sure

Poole/Rasche and Kuttner Measures of Unexpected Funds Rate Target Changes(Post-1993)

Poole/Rasche Measure

NOTE: Denotes unexpected target changes associated with intermeeting changes in the funds rate target.

Figure 1

of the two data sets. As a further check on the datingof the target change, we consulted the Report of OpenMarket Operations and Money Market Conditions(hereafter ROMO), which is prepared biweekly by theManager of the Trading Desk of the Federal ReserveBank of New York (the Desk). A detailed analysis ofthese differences led us to use the Secretariat’s dateof July 6, 1989, rather than the New York Fed’s dateof July 7. The boxed insert provides a discussion ofthe more interesting dating conflicts, including theJuly 1989 conflict.

The market began to focus more attention oninterest rates, including the federal funds rate, in1987. Earlier in the decade of the 1980s, much ofthe discussion of policy was in terms of the effectof policy actions on the rate of money growth. Awarethat Fed actions to increase or decrease reserve pres-sure influenced the federal funds rate, the marketincreasingly gauged policy by movements in thefunds rate. However, market analysts frequentlywere unable to determine whether changes in thefunds rate signaled a monetary policy action. Inthe early part of 1988, it appears that the marketbecame more aware that the Fed was relying heavilyon the funds rate to implement policy and marketanalysts began to surmise the Fed’s intentions forthe funds rate by observing Desk operations relativeto the behavior of the funds rate.

Table 6 reports the amounts and dates of allfunds rate target changes and the new effective targetlevel reported by the Federal Reserve Bank of NewYork between August 1987 and December 1993.14

If there is a difference between the New York series

and the Secretariat’s series, the Secretariat’s datingof the action is also indicated. The table also indicateswhether the discount rate was changed. UnderChairman Greenspan the funds rate target waschanged whenever the discount rate was changed.This was not the case previously; more often thannot the discount rate and the funds rate target werechanged on different days.

Despite the increased awareness that the Fedwas paying attention to the funds rate in conductingmonetary policy, there is little indication that themarket was aware that the Fed was setting an explicitobjective for the federal funds rate before 1989. Webelieve that the first time in the 1980s that marketparticipants knew that policy action occurred wasMay 9, 1988, when the Desk injected fewer reservesthan analysts expected. This action sparked specu-lation that the Fed was increasing its fight againstinflation, and market analysts concluded that theaction would cause the funds rate to trade at 7 per-cent or slightly higher.15

JULY/AUGUST 2002 73


EV Estimates with Target Changes Partitioned into Those That Were and Were Not Accompaniedby a Change in the Discount Rate

Rate α β1 β ′1 β3 R

– 2/se

∆tb3 –0.122 (0.11) 0.071 (0.03) 0.075 (0.06) 0.738 (0.30) 0.577/0.088

∆tb6 –0.035 (0.01) 0.033 (0.04) 0.098 (0.08) 0.605 (0.23) 0.509/0.076

∆tb12 –0.036 (0.01) 0.005 (0.05) 0.112 (0.08) 0.546 (0.21) 0.370/0.081

∆T2yr –0.029 (0.02) –0.016 (0.05) 0.161 (0.13) 0.388 (0.22) 0.127/0.096

∆T5yr –0.030 (0.02) –0.064 (0.05) 0.142 (0.14) 0.256 (0.25) 0.000/0.105

∆T10yr –0.026 (0.02) –0.083 (0.05) 0.093 (0.11) 0.118 (0.24) 0.000/0.097

∆T30yr –0.030 (0.01) –0.072 (0.04) 0.055 (0.10) 0.002 (0.10) 0.014/0.107


∆ ∆ ∆ ∆ ∆ ∆i ff dr ff no dr fft t t tu

t= + + ′ + +α β β β ε1 1 3* * *| |

Table 5

14 As Kuttner (2001) has noted, the target change that occurred at theDecember 1990 FOMC meeting was effectively revealed to the marketwith the announcement of a 50-basis-point cut of the discount rate onDecember 18. The announcement was made at 3:30 p.m., however,after the markets had closed. Consequently, this change is dated asDecember 19. It should also be noted that there are two dates in Table6 that differ from those reported in Thornton and Wheelock (2000,Appendix B). The first is October 16, 1989; Thornton and Wheelockoriginally used October 18. The second is January 9, 1991, originallydated January 8.

15 This is also one of the dates where there is discrepancy on exactlywhen the change was implemented. The Secretariat’s series suggeststhat the change took place on May 7. There is no indication that themarket was aware of an action on that date, however.

The market was not consistently aware of targetchanges at the time they happened until late 1989.This is about the time that the Fed began the practiceof making target changes in multiples of 25 basispoints. After late 1989 market analysts appear tohave become adroit at identifying target changeswhen they occurred. In most cases analysts deter-mined that the target had changed based on signalsfrom the Desk. In many cases, however, the precisenature of the signal was not specified.

Did Market Analysts Anticipate FedActions?

In order to make the EV adjustment, we mustagain identify days on which the market was affectedonly by ambient news. Hence, the relevant questionis, did market analysts anticipate Fed actions? The

answer is yes, and no. There were many occasionswhen actions to increase or decrease pressure inthe reserve market came as no surprise. Informationon the state of the economy, inflation, or movementsin the short-term interest rate fueled speculationthat the Fed would soon change the discount rateor take other actions to alter the availability ofcredit. In this sense, there appears to be relativelyfew cases where the market was completely sur-prised by an action.

On the other hand, the precise dating of the Fedaction nearly always surprised the market. Unlikethe post-1993 period, we could find few instanceswhere there was a widespread expectation that theFed would take an action on a particular day. More-over, we found no instance where there was a wide-spread expectation that the Fed would take an

74 JULY/AUGUST 2002


CONFLICT IN THE DATING OFTARGET CHANGES

There are a few cases, deserving of specialattention, where there is conflict in the dating ofthe change in the federal funds rate target asreported by the New York Fed compared with thedating provided by the staff of the Secretariat. Thefirst occurred in January 1989. The New York Fedsuggests the funds rate target was increased by25 basis points on January 5, 1989. The staff ofthe Secretariat is less precise, putting the changeearly in January. From our reading of the WSJ, itis apparent that the market was aware that the Fedchanged policy before January 5; however, theprecise date cannot be determined. On January 5the WSJ merely indicates that analysts thoughtthat the Fed had tightened credit earlier in theweek. The Report of Open Market Operationsand Money Market Conditions (hereafter, ROMO),however, clearly indicates that “on the secondThursday—January 5—the borrowing allowancewas increased to $600 million, in line with theCommittee’s decision at the December meeting.”Hence, while the market thought that the Desktook actions consistent with changing policy inthe first few days of January, the Desk indicatesthat the action was not taken until January 5.

The second case occurred in July 1989. TheNew York Fed dates the change on July 7, theSecretariat on July 6. Market analysts agree withthe Secretariat staff’s dating of the action and

thought the Fed moved on the 6th, when thefunds rate traded significantly below its previoustrading range of 9.5 percent and the Desk madeno attempt to offset the rate move. The ROMOindicates that “after the Committee’s July 5-6meeting, the borrowing allowance was set at$600 million. This adjustment represented aslight intended easing of pressures on reservepositions, while also recognizing the recent risein seasonal borrowing. (In the FOMC’s discus-sion, ‘unchanged’ conditions of reserve availabil-ity were associated with a borrowing level of$650 million; at any event, the Desk continuedto view the borrowing allowance with someflexibility.)” The July 5-6 FOMC meetingadjourned at 11:50 a.m. Eastern time on July 6.Hence, it is very unlikely the Desk implementedthe FOMC’s decision on the 6th. Because of this,the New York Fed dates the change on July 7, butbecause the decision was made on July 6, thestaff of the Secretariat dates the change on the6th. Nevertheless, the market interpreted theDesk’s failure to act on July 6, when the fundsrate traded significantly below the previous tradinglevel, as a policy action. While the decision issomewhat arbitrary, we have decided to use theSecretariat’s dating of this target change.

The third case occurred in October 1989. TheNew York Fed dates the change on October 16 andthe staff of the Secretariat dates it on October 19.Market analysts thought that the Fed had taken a

(Continued on p. 75)

action on the day the funds rate target was actuallychanged. Hence, in this respect, all target changesbefore 1994 were unexpected. Because the marketfrequently saw the need for an action, not all “unex-pected” target changes resulted in large adjustmentsto federal funds futures rates.

We were unable to identify any occasion whenthe market correctly anticipated the Fed’s actionon a particular day, other than at scheduled FOMCmeetings. Consequently, we determined the varianceof the ambient news, σu

2, by using days when therewas no headline announcement, no FOMC meeting,and no change in either the funds rate target or thediscount rate.

The OLS and EV estimates for the pre-1994period are presented in Table 7. The response ofTreasury rates for the pre-1994 period is somewhatlarger than for the post-1993 period, especially atthe longer end of the term structure. Moreover, theR–2s indicate that a much larger proportion of thevariance in Treasury rates on days when the market

knew that the Fed changed the funds rate target isexplained by unexpected target changes. This isparticularly true at the very long end of the termstructure where all rates respond significantly tounexpected target changes. Furthermore, as theefficient market hypothesis suggests, none of therates responds significantly to anticipated targetchanges.

INTERPRETING THE RESPONSE OFTREASURY RATES

Interpreting the response of Treasury rates tounexpected changes in the funds rate target requiresan economic structure. While the simple expecta-tions hypothesis (EH) of the term structure of interestrates is nearly always rejected, longer-term instru-ments are clearly forward looking.16 Consequently,

JULY/AUGUST 2002 75

16 For evidence of the EH when the short-term rate is the effective federalfunds rate, see Hardouvelis (1988), Simon (1990), Roberds, Runkle,and Whiteman (1996), and Thornton (2002).


policy action on October 16, when the Desk didnot attempt to offset a significant decline in thefederal funds rate. Indeed, fff1 declined by 16 basispoints on October 16, suggesting that a very signifi-cant revision in the market’s expectation for thefederal funds rate occurred on that day. Marketanalysts also thought that the Fed took an actionon the 19th, when the Desk added reserves despitethe fact that the funds rate had drifted below theprevious trading level.

The ROMO points to the source of the confu-sion. The ROMO for the maintenance period end-ing October 19, 1989, indicates that

The financial markets were jittery afterthe second weekend, in the wake of the190-point plunge in the Dow JonesIndustrial Average in late afternoon tradingon October 13. New reports over the week-end had cited a “Fed official” as sayingthat the System would assure the provi-sion of adequate liquidity. As a result, mar-ket participants widely expected a reserveinjection on Monday and these anticipa-tions appeared to exert additional down-ward pressure on the funds rate. The Deskresponded to the unsettled conditions infinancial markets by executing customer-

related repurchase agreements on thesecond Monday and Tuesday [October16 & 17]. A final round of customer RPswas arranged on the settlement date[October 18], against the background ofa bit firmer Federal funds rate that morn-ing—83/4 percent—which appeared tostem partly from market uncertainties inthe wake of Tuesday night’s earthquakein San Francisco. Also, a backgroundfactor by this point was the decision dis-cussed at Wednesday’s FOMC conferencecall to begin implementing a slightlymore accommodative reserve posture inlight of recently incoming economicinformation: it was now expected thatFed funds trading would tend to centeraround 83/4 percent.

The New York Fed and the staff of theSecretariat are obviously disputing the datingof the same policy action that could not haveoccurred on the same day. The discussion inthe ROMO gives rather weak support to theSecretariat’s dating, but the Desk’s action ofinjecting reserves on October 16 when the fundsrate was declining suggests that the Desk was pur-suing a lower funds rate on Monday. Consequently,we use the New York Fed’s dating of this action.

(Continued from p. 74)

76 JULY/AUGUST 2002


Knowledge of Fed Actions Obtained from Reading the Credit Markets Column of the Wall Street Journal

Poole/Rasche Date ff * ∆ff * Secretariat shock Knowledge

8/27/87 6.7500 0.1250 NA No

9/03/87 6.8750 0.1250 NA No

9/04/87† 7.2500 0.3750 NA No

9/22/87 0.1250 NA No

9/24/87 7.3125 0.0625 NA No

10/22/87 7.1250 –0.1875 NA No

10/23/87 –0.3750 NA No

10/28/87 7.0000 –0.1250 NA No

11/04/87 6.8125 –0.1875 NA No

1/28/88 6.6250 –0.1875 NA No

2/10/88 –0.1250 NA No

2/11/88 6.5000 –0.1250 NA No

3/29/88 0.2500 NA No

3/30/88 6.7500 0.2500 NA No

5/07/88 0.2500 NA No

5/09/88 7.0000 0.2500 NA Yes

5/25/88 7.2500 0.2500 NA No

6/22/88 7.5000 0.2500 NA No

7/19/88 7.6875 0.1875 NA No

8/08/88 7.7500 0.0625 NA No

8/09/88† 8.1250 0.3750 NA Yes

10/20/88 8.2500 0.1250 0.00 No

11/17/88 8.3125 0.0625 0.07 No

11/22/88 8.3750 0.0625 0.07 No

12/14/88 0.4000 0.02 No

12/15/88 8.6875 0.3125 0.05 Yes

12/29/88 8.7500 0.0625 –0.06 No

Early 1/89 0.3125 NA Yes

1/05/89 9.0000 0.2500 0.00 No

2/09/89 9.0625 0.0625 0.01 No

2/14/89 9.3125 0.2500 0.04 Yes

2/23/89 9.5625 0.2500 0.14 Yes

2/24/89† 9.7500 0.1875 0.14 Yes

5/04/89 9.8125 0.0625 0.02 No

6/06/89 9.5625 –0.2500 0.01 Yes

7/06/89 –0.2500 0.03 Yes

7/07/89 9.3125 –0.2500 –0.05 No

7/27/89 9.0625 –0.2500 –0.06 No

8/10/89 9.0000 –0.0625 0.02 No

Table 6

it is reasonable to assume that the long-term rate isdetermined, at least in part, by the market’s expec-tation of the funds rate target. The simple EH hypoth-esizes that the long-term rate is equal to the market’sexpectation for the overnight federal funds rate overthe holding period of the long-term rate plus a con-stant risk premium, π, i.e.,

(12) ,

where itn denotes the n-day maturity Treasury rate

on day t and π n denotes a maturity-specific constantrisk premium. It is perhaps more reasonable toassume that there is a time-varying component to

i n E fftn

t t iin n= ∑ ++=

−( )1 01/ π

the risk premium, so that the EH can be more gen-erally written as

(13) ,

where ωt denotes the unobserved time-varyingcomponent of the risk premium and vt

n denotes arandom idiosyncratic shock to the n-day maturityTreasury rate.

Substituting (2) into (13) and taking the firstdifference yields

(14).

To see how our results can be interpreted, we

∆ ∆ ∆i n E ff E fftn

t t i t t iin

t tn= −∑ + ++ − + −=

−( ) [ ]1 1 101/ * * ω ν

i n E fftn

t t iin n

t tn= ∑ + + ++=

−( )1 01/ π ω ν

JULY/AUGUST 2002 77


Knowledge of Fed Actions Obtained from Reading the Credit Markets Column of the Wall Street Journal

Poole/Rasche Date ff * ∆ff * Secretariat shock Knowledge

10/16/89 8.7500 –0.2500 –0.16 Yes

10/19/89 –0.2500 0.00 Yes

11/06/89 8.5000 –0.2500 0.03 No

12/19/89 –0.2500 0.00‡ No

12/20/89 8.2500 –0.2500 –0.17‡ Yes

7/13/90 8.0000 –0.2500 –0.09 Yes

10/29/90 7.7500 –0.2500 –0.02 Yes

11/14/90 7.5000 –0.2500 0.02 No

12/07/90 7.2500 –0.2500 –0.14 Yes

12/19/90† 7.0000 –0.2500 –0.16 Yes

1/08/91 6.7500 –0.2500 –0.10 Yes

2/01/91† 6.2500 –0.5000 –0.20 Yes

3/08/91 6.0000 –0.2500 –0.13 Yes

4/30/91† 5.7500 –0.2500 –0.17 Yes

8/06/91 5.5000 –0.2500 –0.09 Yes

9/13/91† 5.2500 –0.2500 –0.04 Yes

10/31/91 5.0000 –0.2500 –0.05 No

11/06/91† 4.7500 –0.2500 –0.12 Yes

12/06/91 4.5000 –0.2500 –0.11 Yes

12/20/91† 4.0000 –0.5000 –0.26 Yes

4/09/92 3.7500 –0.2500 –0.21 Yes

7/02/92† 3.2500 –0.5000 –0.32 Yes

9/04/92 3.0000 –0.2500 –0.20 Yes

NOTE: †Indicates the target change was accompanied by a change in the discount rate.‡The Poole/Rasche measure is unavailable on these days, so the Kuttner measure is reported.

Table 6 cont’d

impose the restriction that the market only respondsto unexpected target changes so that equation (6)can be rewritten as

(15) .

Given these assumptions, the OLS estimator of β2is equal to

(16)

.

The problem is that fft*u is unobservable. To

see the potential problems associated with usingthe federal funds futures rate, assume that the h-month-ahead federal funds futures rate is equal tothe market’s expectation for the average effectivefederal funds rate h months into the future, adjustedfor term premiums and idiosyncratic shocks, i.e.,

(17) ,

where ϕh+θth denotes the potential constant and

time-varying components of a term premium forthe h-month-ahead federal funds futures rate, ffk

h

denotes the effective federal funds rate on day kof month h in the future, and ηt

h denotes an idiosyn-cratic shock to the h-month federal funds futuresrate. Taking the first difference of (17) yields

fff m E ffth

t kh

km h

th

th= ∑ + + +=( )1 1/ ϕ θ η

ˆ

/ * * *

*

β

ω ν

2

1 101

1

2

1

11

1

=

− + +∑∑

∑

+ − + −=−

=

=

Tn E ff E ff ff

Tff

t t i t t i t t tu

in

t

T

tu

t

T

[( ) [ ] ][ ]

[ ]

∆

∆

∆ ∆i fftn

tu

t= + +α β ε2*

(18)

.

Assuming that the target change (γ ) is expectedto be constant over the next month and that Et ffk

1=Et ffk

*, the Poole/Rasche measure of the unexpectedtarget change is ∆fff t

1=γ+∆θt1+∆ηt

1, so that γ=∆fff t

1 – ∆θt1 – ∆ηt

1. Substituting this expression into(16) yields

(19)

.17

Assume that (i) the idiosyncratic shocks areindependent of each other and of the time-varyingterm premiums, (ii) ρ̂ is an estimate of the coefficientof the correlation between the change in the time-varying components of the term premiums, and(iii) s2

∆ϖ and s2∆θ are estimates of the variance of the

time-varying components for the Treasury and fed-eral funds futures rates, respectively. If participantsin the Treasury market revise their expectationfor the funds rate target permanently, i.e., Et ff *

t+i

–Et –1 ff *t+i –1=γ, for all i, (19) can be rewritten as

ˆ

/ * *

β

ω ν γ θ η

γ θ η

2

1 101

1

2

1

11

1

=

− + + − −∑∑

− −∑

+ − + −=−

=

=

Tn E ff E ff

T

t t i t t i t t t tin

t

T

t tt

T

[( ) [ ] ][ ]

[ ]

∆ ∆ ∆ ∆

∆ ∆

∆ ∆ ∆fff m E ff E ffth

t kh

t kh

km

th

th= −∑ + +−=( ) [ ]1 11/ θ η

78 JULY/AUGUST 2002

17 The maturity superscripts have been dropped for notational convenience.


OLS and EV Estimates of the Response of Treasury Rates to Target Surprises Using thePoole/Rasche Measure (Pre-1994)

OLS EV


– 2/se

∆tb3 –0.017 (0.01) 0.067 (0.06) 0.774 (0.09) 0.844/0.042 –0.017 (0.01) 0.027 (0.07) 0.823 (0.10) 0.840/0.042

∆tb6 –0.023 (0.02) –0.012 (0.11) 0.840 (0.09) 0.816/0.047 –0.023 (0.01) –0.059 (0.12) 0.899 (0.11) 0.811/0.048

∆tb12 –0.006 (0.01) 0.014 (0.05) 0.860 (0.09) 0.861/0.042 –0.006 (0.01) –0.032 (0.06) 0.918 (0.10) 0.856/0.042

∆T2yr 0.002 (0.01) 0.040 (0.08) 0.715 (0.12) 0.545/0.078 0.003 (0.01) 0.003 (0.09) 0.761 (0.14) 0.543/0.078

∆T5yr 0.002 (0.01) 0.021 (0.08) 0.534 (0.13) 0.413/0.073 0.002 (0.01) –0.007 (0.09) 0.569 (0.14) 0.411/0.074

∆T10yr 0.010 (0.01) 0.008 (0.07) 0.399 (0.10) 0.304/0.067 0.011 (0.01) –0.014 (0.07) 0.426 (0.11) 0.302/0.067

∆T30yr 0.008 (0.01) 0.062 (0.07) 0.264 (0.09) 0.187/0.072 0.008 (0.01) 0.051 (0.07) 0.277 (0.10) 0.186/0.065



t= + + − +α β β β ε1 2 1* *( )

Table 7

If there are neither time-varying risk premiums noridiosyncratic shocks to the federal funds futuresrate, β̂ 2=1. To the extent that we have correctedfor the bias due to common shocks, the estimate ofβ̂ 2 should be close to 1 if the market participantspermanently revise their expectation for the fundsrate target point-for-point with the unexpectedtarget change and if the idiosyncratic variation inthe 1-month futures rate is relatively small.

Estimates of β̂ 2 will be less than 1 if the marketbelieves that the change in the target will last for aperiod that is shorter than the maturity of the instru-ment. Note that the estimate of β̂ 2 could also begreater than 1. This could occur if market partici-pants believe that the unexpected target changewill lead to further changes in the same direction.18

If the market correctly anticipates the magnitudeof the Fed’s action but misses the timing, the sizeof the response will depend on the extent to whichthe market missed the timing—the larger the miss,the larger the response.

The estimates of β2 in Tables 3 and 7 for thepost-1993 and pre-1994 periods suggest thatTreasury rates respond significantly to unexpectedchanges in the Fed’s funds rate target. For both the3- and 6-month T-bill rates the estimated coefficientis not significantly different from 1, suggesting thatthe market revises its expectation for the funds ratetarget several months into the future point-for-pointwith the unexpected change in the target. Duringthe pre-1994 period, the estimated coefficients onthe 12-month and 2-year rates are also not signifi-cantly different from 1, suggesting that the marketrevised its expectation for the funds rate target overa longer horizon before 1994. In most of theseinstances, however, the point estimates are quitedifferent from 1. It is impossible to say whether thisis due to missing the timing of the Fed’s action orto the relative importance of idiosyncratic variationin the futures rate.

For both periods, the response of the Treasuryrate to unexpected target changes declines as theterm lengthens. For the post-1993 period, theresponse is not significantly different from zero for

ˆ

ˆ .

βγ ω ν γ θ η

γ θ η

γ ργ

ω θ

θ η

21

2

12

2 2 2

1

1=

+ + − −∑

− −∑

= −+ +

=

=

T

T

T s s

T s s

t t t tt

T

t tk

N

[ ][ ]

[ ]

∆ ∆ ∆ ∆

∆ ∆

∆ ∆

∆ ∆

maturities beyond 12 months. Indeed, for the 10-and 30-year rates the point estimates are essen-tially zero. In contrast, for the pre-1994 period theresponse is statistically significant for all maturities.

One possible interpretation for the generalresult that the response declines as the maturitylengthens is that the market believes that the fundsrate will stay at its new level for a relatively shortperiod of time. For the pre-1994 period, the responseis nearly the same for maturities up to 12 monthsand then declines. Kuttner (2001) and Cook andHahn (1989) interpret this result to “mean reversion”of the federal funds rate. Specifically, they suggestthat beyond one year, the market expects the fundsrate to revert to its mean level. The cycles in thenominal federal funds rate are very long, however.It seems unlikely that the market would anticipatethat the funds rate would start to return to its meanlevel in just over a year. Moreover, for the post-1993period, the estimated coefficients begin to declineafter three months. For this explanation to accountfor the post-1993 results, the market would have toanticipate mean reversion after three months—anincredibly short period.

CASE STUDIES

A potential problem in interpreting the estimateof β2 arises from the fact that all interest rates areaffected by publicly available information. Casestudies can shed light on this and several other issues.

To illustrate the potential problem, note that(15) is actually

(21) .

Now assume that equation (21) is mistakenly esti-mated using days when there were no unexpectedchanges in the funds rate target, i.e.,

(22) .

Substituting (14) and (18) into (22), it is easy to showthat the OLS estimate of β is equal to

(23) .

Estimates of β will be zero if and only if ρ̂=0. If theterm premiums are positively correlated, the esti-mate of β will be larger the larger is ρ̂ and the smalleris the idiosyncratic variance in the federal funds

ˆ ˆβ ρ ω θ

θ η=

+s s

s s∆ ∆

∆ ∆2 2

∆ ∆ ∆i fff fftn

t tu

t= + = +α β ε[ ]1 0| *

∆ ∆ ∆i fff fftn

t tu

t= + ≠ +α β ε[ ]1 0| *

JULY/AUGUST 2002 79

18 It cannot be exactly zero because the term of the bill rate shortensfrom one day to the next.


(20)

futures rate. If the magnitude of ρ̂ declines as theterm to maturity on Treasury rates lengthens, sotoo will estimates of β.

Identifying times where there were unexpectedchanges in the funds rate target is critical for inter-preting the results, because of the potential for cor-relation between changes in Treasury rates andchanges in the federal funds futures rate even whenthere are no changes in the funds rate target orexpectations thereof. We have been careful; never-theless, it is important to check the robustness ofour interpretation of the results. As a check on ourinterpretation, we undertook a case-by-case inves-tigation of the response of federal funds futuresrates to each unexpected target change noted inTable 2. In each instance, we examined the rates onfederal funds futures contracts for the month ofthe event and for the months leading up to and justafter the surprise events identified in Table 2.

Before discussing the findings in general, it isuseful to get an idea of the methodology with twoillustrative examples (a detailed analysis of eachof the surprise events is presented in the appendix).The first example is for the intermeeting targetchange that occurred on April 18, 1994. The com-mentary indicated that the market anticipated thatthe Fed would raise the funds rate, but the timingof the April move was unexpected. For the periodleading up to and just after the April 18, 1994,increase in the funds rate target, Figure 2 showsthe rates on the April, May, and June federal fundsfutures contracts, the funds rate target, and the

average funds rate target for April. The average targetis the weighted average of the target of 3.5 percentfor 18 days and 3.75 percent for 12 days.

During March (at least as early as the releaseof the report on the employment situation forFebruary 1994 on March 4), the prevailing expecta-tion was as follows: there was a high probability ofa 50-basis-point increase before the beginning ofMay, with an even higher intended funds rate onaverage during June. The increase in the funds ratetarget that occurred in March was expected andthere was no revision of the market’s expectationfor the future funds rate target.

The situation after the April intermeeting moveis very different. Figure 3 shows that there was asignificant revision in the market’s expectation forthe funds rate in May and June immediately uponthe Fed’s April action. For most of the period subse-quent to the intermeeting change in the intendedfunds rate in April, market participants assigned ahigh probability to an additional increase of 50 basispoints at the May FOMC meeting. Market participantshad come to expect that a 50-basis-point increaseover the target established in April would prevailduring May and were assigning a high probabilityof an additional 25-basis-point increase at the JuneFOMC meeting. In late March, expectations of evenhigher intended funds rates for April, May, and Juneprevailed; however, these expectations were reversedby early April. Consistent with our interpretationof the regression results, the April action appearsto have caused market participants to significantly

80 JULY/AUGUST 2002


Apr 1994 May 1994 Jun 1994 Target

Apr Average Target

Funds Futures for April 1994 FOMC Event

7 14 21 28 7 14 21 28 4 11 18 25 2

February March April

3.00

3.25

3.50

3.75

4.00

4.25

Figure 2

Funds Futures for May 1994 FOMC Event

3.25

3.50

3.75

4.00

4.25

4.50

4.75

May 1994 Jun 1994 Jul 1994 Target

May Average Target

7 14 21 28 4 11 18 25 2 9 16 23 30

March April May

Figure 3

revise their expectations for the funds rate in Mayand June.

For 9 of the 14 target changes where our analysisof market commentary suggested that the marketwas surprised by the Fed’s action, there was a clearindication that the market revised its expectationfor the funds rate out two months. On one of theseoccasions (July 6, 1995), however, the market’sexpectation for the funds rate out two months wassignificantly revised in the weeks following thetarget change.

There appeared to be no significant revision ofthe market’s expectation for the funds rate out twomonths on five occasions. One of these occasionsoccurred on March 22, 1994, shown in Figure 4. Themarket had revised its expectation for the fundsrate in May, a couple of weeks prior to the MarchFOMC meeting. While our analysis of the commen-tary suggested that the March action was a surprise,both the Poole/Rasche and Kuttner measures of theunexpected target change were very small. Hence,it may be that the commentary did not reflect thetrue market expectations at the time of the action.

Another instance when there was no revisionof the market’s expectation occurred on March 20,2001, shown in Figure 5. At the time the FOMCreduced the funds rate target by 50 basis points,market participants were anticipating a 75-basis-point reduction; however, there was no immediaterevision of the market’s expectation following theannouncement.

On three of the five occasions, the Poole/Rasche

measure of the unexpected target change was 6basis points or less—about two standard deviationsof the variation in this measure associated withambient news, suggesting that these actions wereperhaps less of a surprise than the market commen-tary suggested. Moreover, on all occasions whenthe Poole/Rasche measure was larger than 10 basispoints, the market appeared to revise its expectationfor the funds rate at least two months out, suggest-ing that market participants might not revise theirlonger-run outlook for the funds rate target exceptin cases where they make a relatively large error inforecasting the Fed’s action.

Market participants should not only revise theirexpectations when there is a surprise change inthe funds rate, but also when they are surprisedthat the target was not changed. We identified onlyfour such events. Our analysis suggests that of thesefour cases, three were instances when market partici-pants revised their expectations for the future federalfunds rate when the Fed failed to act as expected.

The most dramatic of these occurred inSeptember 1996. The commentary indicated thatmarket participants expected an FOMC action.Figure 6 shows the rates on the September, October,and November futures rate contracts before andafter the September 1996 meeting. Both the futuresrates and the market commentary suggest that mar-ket participants were expecting the FOMC to raisethe target at the September FOMC meeting and wereexpecting additional subsequent increases. Whenthe FOMC unexpectedly left the target unchanged,

JULY/AUGUST 2002 81


Funds Futures for March 1994 FOMC Event

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

Mar 1994 Apr 1994 May 1994 Target

Mar Average Target

3 10 17 24 31 7 14 21 28 7 14 21 28

January February March

Figure 4


4.50

4.75

5.00

5.25

5.50

5.75

Mar 2001 Apr 2001 May 2001 Target

Mar Average Target

5 12 19 26 5 12 19 26 2

February March

Figure 5

market participants significantly revised downtheir expectations for the funds rate in October andNovember. In the three cases where the Fed’s inactionprompted markets to revise their longer-term expec-tations for the funds rate, the revision in expectationsappears to be large relative to those cases wherethe FOMC took a surprise action. This finding isconsistent with our previous interpretation in that,if the market expects a 25-basis-point change in thetarget and the FOMC does nothing, the unexpectedaction is relatively large.

The exception occurred in September 1994,shown in Figure 7, when the surprise decision not tochange the rate at the FOMC meeting of September27, 1994, had essentially no effect on the market’sexpectation for the federal funds rate in Octoberand November.

DOES GREATER TANSPARENCY HELP?

The FOMC has made a number of proceduralchanges that should have helped the market antici-pate policy actions. Analysis of the period before the1994 implementation of the practice of announcingtarget changes is hampered by the fact that mosttarget changes were made during the intermeetingperiod. Because the market could never be surewhen a change was most likely to occur, marketcommentary never predicted the date or the mag-nitude of Fed actions before 1994. Hence, marketcommentary at that time cannot be used to deter-mine target changes that were or were not expected,

as was done for the post-1993 period. Table 2, how-ever, shows that for actions since 1994 that were notsurprise actions, the Poole/Rasche measure of theunexpected target change was nearly always lessthan 6 basis points (about two estimated standarddeviations of the variation in the 1-month futuresrate associated with ambient news). Hence, one wayto determine expected target changes is to assumethat the market anticipated the Fed’s action whenthe Poole/Rasche measure of the unexpected targetchange is 6 basis points or smaller. Using this crite-rion, of the 24 target changes before 1994 that themarket was aware had occurred, only 6 were antici-pated; 18 target changes were unanticipated.

Moreover, if one assumes that changes in thecurrent or 1-month federal funds futures rate mea-sures the degree of the unexpected target change,there were only three instances, on days when themarket knew that the target had been changed,when there were large unexpected target changes.All three of these are associated with intermeetingtarget changes.

Using the same criterion for the post-1993period indicates that 10 of the 24 target changeswere unanticipated. Our analysis of market com-mentary suggested that 14 target changes wereunanticipated, but we concluded that the marketanticipated the FOMC’s action only if market partici-pants correctly anticipated the size and the timingof the action.

While the above analysis is simple, it suggeststhat the market has been able to better forecast Fed

82 JULY/AUGUST 2002


Funds Futures for September 1996 FOMC Event

5.20

5.25

5.30

5.35

5.40

5.45

5.50

5.55

5.60

Sep 1996 Oct 1996 Nov 1996 Target

5 12 19 26 2 9 16 23 30

August September

Figure 6


4.2

4.4

4.6

4.8

5.0

5.2


1 8 15 22 29 5 12 19 26

August September

Figure 7

actions since the 1994 procedural change. In thisregard, more transparency appears to help. Thisfinding is not too surprising, however, since it isreasonable to expect that the market does a betterjob of anticipating policy actions when the timingof those actions is somewhat constrained by theFOMC’s practice. Hence, somewhat more compel-ling evidence of the value of transparency can beobtained by determining whether the market isbetter able to predict Fed actions further in advance.

How Far in Advance Does the MarketAnticipate Fed Actions?

Our results suggest that after 1994, marketparticipants usually have anticipated changes inthe funds rate target by the time they have occurred.The more transparent the Fed is, the further inadvance the market should be able to predict policyactions. To get an idea of how far in advance themarket anticipates Fed actions, we once again usethe case study approach. Specifically, we plot (i) therate on the federal funds futures contract for themonth of target changes that we classified as “nosurprise” in Table 2 and (ii) the average federal fundsrate target for that month. Care must be takenbecause of the possibility of changes in the termpremium. Nevertheless, if the market correctlyanticipates the event, the rate on the federal fundsfutures contract for the month of the event shouldmove to the level of the average effective federalfunds rate before the event and stay close to thatrate until the time of the event.

There were ten such events during the post-1993period. Of these, our analysis suggests that on sevenof these occasions the market anticipated the changetwo or more weeks in advance. For the change onMarch 21, 2000, shown in Figure 8, market partici-pants appear to have anticipated the action about12 weeks in advance. Indeed, before Christmas 1999market participants correctly anticipated both theFebruary and March actions.

Two of the more remarkable cases are associatedwith the target changes that occurred on June 30and August 24, 1999. Figures 9 and 10 show the July

JULY/AUGUST 2002 83



5.4

5.5

5.6

5.7

5.8

5.9

6.0

6.1

Mar 2000 Target Mar Average Target

6 13 20 27 3 10 17 24 31 7 14 21 28

January February March

6 13 20 27

December

Figure 8

Funds Futures for June 1999 FOMC Event

4.70

4.75

4.80

4.85

4.90

4.95

5.00

5.05

5.10

Jul 1999 Target Jul Average Target

17 24 31 7 14 21 28 5 12 19

June July

26 2

Figure 9

Funds Futures for August 1999 FOMC Event

4.7

4.8

4.9

5.0

5.1

5.2

5.3

Aug 1999 Target Aug Average Target

7 14 21 28 5 12 19 26 2 9 16 23

June July August

30

Figure 10

and August federal funds futures rates and the aver-age effective funds rate target for those months,respectively. By early June the market had come toexpect not only the action taken on June 30, butthe action taken on August 24 as well.

On the remaining three occasions, the actionsappear not to have been expected until just daysprior to the meetings. Hence, while the commenta-tors were correct that these actions were widelyanticipated, it appears that the market did not figureout what the FOMC was about to do until just daysbefore the meeting.

To see whether the market’s ability to predictFed actions has improved since the beginning of1994, we considered the six instances prior to 1994where the market expected the Fed’s action, usingthe criterion that the market expected the action ifthe Poole/Rasche measure of the unexpected targetchange is 6 basis points or less. Trading in the federalfunds futures contracts began only two monthsprior to one of these occasions, December 1988.Moreover, there was no evidence that the marketwas aware that the Fed was targeting the funds rateat that time. For both of these reasons, analysis ofthis event is inappropriate.

Of the remaining five instances, there is onlyone instance, July 6, 1989, when the market appearsto have anticipated the Fed’s action well in advance.19

Figure 11 suggests that the 25-basis-point targetchange made at that time was anticipated by earlyJune.

This analysis also supports the conclusion that

transparency is important. After 1994, not only isthe market better able to anticipate when the Fedwill act, but, more importantly, there is some evidencethat the market is able to predict those actions furtherin advance. Greater clarity should enable the marketto better predict how the Fed is likely to respond toincoming information about economic fundamentals.

DISCUSSION

This paper investigates the extent to whichmarket participants anticipate Fed actions, focusingon the period since the late 1980s. This period isnearly ideal. The Fed has been explicitly targetingthe overnight federal funds rate during the entireperiod that the federal funds futures rate has beenavailable to measure the market’s expectation forthe federal funds rate and, consequently, the fundsrate target.

A natural way to proceed in this environmentis to use the change in the futures rate as a proxyfor the unexpected change in the funds rate targetand then estimate the response of longer-termrates to the unexpected target change. A significantresponse of longer-term rates suggests that theunexpected change in the funds rate target causedmarkets to revise their longer-term expectationsfor the funds rate. While this procedure can provideuseful information about how market participantsrevise their longer-run expectations, we note thatcare is required. For one thing, there is a measure-ment error associated with using the change in thefutures rate to proxy the unexpected target change;it arises because idiosyncratic and other shockscause variation in federal funds futures rates evenwhen there are no changes in the funds rate target.This measurement error also can bias down theestimated response of other rates to the unexpectedtarget change. In addition, this procedure requiresthat market participants know that the Fed haschanged its funds rate target. If market participantsdo not know that the target has been changed, thechange in the futures rate does not reflect the un-expected target change. This problem, of course,applies to the pre-1994 period when target changeswere not announced.

Accounting for both of these problems, we esti-mate the response of Treasury rates of various matu-rities from 3 months to 30 years to unexpectedtarget changes for periods before and after the

84 JULY/AUGUST 2002


Funds Futures for July 1989 FOMC Event

8.4

8.6

8.8

9.0

9.2

9.4

9.6

9.8

10.0

Jul 1989 Aug 1989 Sep 1989 Target

Jul Average Target

5 12 19 26 3 10 17 24 31

June July

Figure 11

19 The figures for the other four dates and for December 1988 are pre-sented in the appendix.

FOMC’s 1994 procedural change. We find that theresponse of the 3-month T-bill rate is nearly identicalbefore and after this procedural change. The magni-tude and significance of the response of longer-termrates, however, declines after this procedural change.One possible explanation for the smaller responseof longer-term rates is that the Fed has been moretransparent about its longer-run policy intentions.Under this interpretation, the market would haverelatively firm expectations that the Fed will changethe funds rate target at some point in the future, butmay have less-firm expectations of exactly whenthat change will occur. If only the timing of the targetchanges were unexpected, shorter-term futuresrates would respond more to announcements of atarget change than would longer-term rates.

We note that the interpretation of the responseof Treasury rates to unexpected changes in thefunds rate target is complicated by the possibilitythat all forward-looking rates might respond to com-mon information, such as information that altersthe market’s expectation of the term premium. Forthis reason, extreme care must be exercised in identi-fying unexpected changes in the funds rate target.To address this issue, we undertake a case-by-caseanalysis of occasions when market commentaryindicted that the market was surprised by the Fed’saction or inaction. This analysis suggests that, inmost of those cases, market participants revisedtheir expectations for the funds rate at least twomonths out in response to an unexpected targetchange. Moreover, there is some indication that thelarger the unexpected target change, the more likelyit is that the market will revise its expectation forthe funds rate.

Our most important finding is that greatertransparency appears to help. Not only is the marketbetter able to anticipate funds rate target changes,but it appears that the market is able to anticipatesuch changes further in advance. This is importantsince changes in the funds rate target can have asignificant effect on economic variables only bygenerating changes in longer-term interest rates.The Fed can only affect long-term rates by affectingmarket participants’ expectations for the future fundsrate. The further in advance the market can antici-pate changes in the funds rate, other things the same,the larger will be the corresponding changes inlonger-term rates. Moreover, in such an environment,market responses in anticipation of policy actionsbegin to stabilize the economy long before the policyactions themselves occur.

The interaction of economic policy and marketexpectations has been a core feature of macro-economics for 30 years. In this paper we documentedthe substantial change in the predictability of mone-tary policy that occurred in 1994. The period since1994 has also been one of remarkable economicstability. We believe that the greater transparencyof monetary policy has contributed to this outcome.

REFERENCES

Cook, Timothy and Hahn, Thomas. “The Effect of Changesin the Federal Funds Rate Target on Market Interest Ratesin the 1970s.” Journal of Monetary Economics, November1989, 24(3), pp. 331-51.

Goodfriend, Marvin. “Monetary Mystique: Secrecy andCentral Banking.” Journal of Monetary Economics, January1986, 17(1), pp. 63-92.

Hardouvelis, Gikas A. “The Predictive Power of the TermStructure During Recent Monetary Regimes.” Journal ofFinance, June 1988, 43(2), pp. 339-56.

Hoover, Kevin D. and Jorda, Oscar. “Measuring SystematicMonetary Policy.” Federal Reserve Bank of St. LouisReview, July/August 2001, 83(4), pp. 113-37.

Johnston, J. Econometric Methods. New York: McGraw-Hill,1963.

Kuttner, Kenneth N. “Monetary Policy Surprises and InterestRates: Evidence from the Fed Funds Futures Market.”Journal of Monetary Economics, June 2001, 47(3), pp.523-44.

Lucas, Robert E. Jr. “Econometric Policy Evaluation: ACritique.” Journal of Monetary Economics, 1976, 1(2), pp.19-46.

McCallum, Bennett T. “Monetary Policy Analysis in ModelsWithout Money.” Federal Reserve Bank of St. Louis Review,July/August 2001, 83(4), pp. 145-60.

Meyer, Laurence H. “Does Money Matter?” Federal ReserveBank of St. Louis Review, September/October 2001, 83(4),pp. 1-15.

Poole, William and Rasche, Robert H. “Perfecting theMarket’s Knowledge of Monetary Policy.” Journal ofFinancial Services Research, December 2000, 18(2-3), pp.255-98.

JULY/AUGUST 2002 85


Rasche, Robert H. “The World of Central Banking: Thenand Now,” in Reflections on Economics: Essays in Honorof Martin M.G. Fase. Amsterdam: De Nederlansche BankNV, 2001.

Roberds, William; Runkle, David and Whiteman, Charles H.“A Daily View of Yield Spreads and Short-Term InterestRate Movements.” Journal of Money, Credit, and Banking,February 1996, 28(1), pp. 34-53.

Robertson, John C. and Thornton, Daniel L. “Using FederalFunds Futures Rates to Predict Federal Reserve Actions.”Federal Reserve Bank of St. Louis Review, November/December 1997, 79(6), pp. 45-53.

Simon, David P. “Expectations and the Treasury Bill–FederalFunds Rate Spread over Recent Monetary Policy Regimes.”Journal of Finance, June 1990, 45(2), pp. 467-77.

Taylor, John B. “Expectations, Open Market Operations,and Changes in the Federal Funds Rate.” Federal ReserveBank of St. Louis Review, July/August 2001, 83(4), pp. 33-47.

Thornton, Daniel L. “The Conventional Test of the Expecta-

tions Theory: Resolving Some Anomalies at the Short

End of the Term Structure.” Unpublished manuscript,

Federal Reserve Bank of St. Louis, February 2002.

___________. “Does the Fed’s New Policy of Immediate

Disclosure Affect the Market?” Federal Reserve Bank of

St. Louis Review, November/December 1996, 78(6), pp.

77-86.

___________ and Wheelock, David C. “A History of the

Asymmetric Policy Directive.” Federal Reserve Bank of

St. Louis Review, September/October 2000, 82(5), pp. 1-16.

Whitesell, William; Lange, Joe and Sack, Brian. “Anticipations

of Monetary Policy in Financial Markets.” Unpublished

manuscript, Board of Governors of the Federal Reserve

System, March 2001.

Woodford, Michael. “Monetary Policy in the Information

Economy.” Unpublished manuscript, August 2001.

86 JULY/AUGUST 2002


Appendix

Funds Futures for December 1994 FOMC Event

4.50

4.75

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

Dec 1994 Jan 1995 Feb 1995 Target

7 14 21 28 5 12 19 26 2

November December

Figure A1-A


5.45

5.50

5.55

5.60

5.65

5.70

5.75

5.80

5.85

May 1997 Jun 1997 Jul 1997 Target

7 14 21 28 5 12 19 26

April May

Figure A1-B

JULY/AUGUST 2002 87


Funds Futures for August 1994 FOMC Event

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

Aug 1994 Sep 1994 Oct 1994 Target

Aug Average Target

2 9 16 23 30 6 13 20 27 4 11 18 25

May June July

1 8 15 22 29

August

Figure A2-A

Funds Futures for November 1994 FOMC Event

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

Nov 1994 Dec 1994 Jan 1995 Target

Nov Average Target

5 12 19 26 3 10 17 24 31

September October November

7 14 21 28

Figure A2-B

Funds Futures for July 1995 FOMC Event

5.5

5.6

5.7

5.8

5.9

6.0

6.1

6.2

6.3

Jul 1995 Aug 1995 Sep 1995 Target

Jul Average Target

1 8 15 22 29 5 12 19 26 3 10 17 24

May June July

31

Figure A2-C


5.2

5.3

5.4

5.5

5.6

5.7

5.8


Dec Average Target

4 11 18 25 2 9 16 23 30 6 13 20 27


4 11 18 25 1

December

Figure A2-D

88 JULY/AUGUST 2002


Funds Futures for January 1996 FOMC Event

5.0

5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

Feb 1996 Mar 1996 Apr 1996 Target

Feb Average Target

6 13 20 27 4 11 18 25 1 8 15 22 29

November December January

5 12 19 26

February

Figure A2-E

Funds Futures for October 1998 FOMC Event

4.7

4.8

4.9

5.0

5.1

5.2

5.3

5.4

5.5

5.6

Oct 1998 Nov 1998 Dec 1998 Target

Oct Average Target

6 13 20 27 3 10 17 24 31 7 14 21 28

July August September

5 12 19 26

October

Figure A2-F


4.48

4.64

4.80

4.96

5.12

5.28

5.44

5.60


Nov Average Target

7 14 21 28 5 12 19 26 2 9 16 23 30


Figure A2-G


5.20

5.25

5.30

5.35

5.40

5.45

5.50

5.55


Nov Average Target

6 13 20 27 4 11 18 25 1 8 15 22 29


Figure A2-H

JULY/AUGUST 2002 89



5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

Jan 2001 Feb 2001 Mar 2001 Target

Jan Average Target

2 9 16 23 30 6 13 20 27 4 11 18 25

October November December

1 8 15 22

January

29

Figure A2-I

Funds Futures for April 2001 FOMC Event

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

Apr 2001 May 2001 Jun 2001 Target

Apr Average Target

5 12 19 26 2 9 16 23 30

March April

Figure A2-J

90 JULY/AUGUST 2002



4.95

5.04

5.13

5.22

5.31

5.40

5.49

5.58

Oct 1998 Target Oct Average Target

17 24 31 7 14 21 28 5 12 19

September October

26 2

Figure A3-C

Funds Futures for February 2000 FOMC Event

5.45

5.50

5.55

5.60

5.65

5.70

5.75

5.80

5.85

Feb 2000 Target Feb Average Target

20 27 3 10 17 24 31 7 14 21

January February

28

Figure A3-D


5.44

5.60

5.76

5.92

6.08

6.24

6.40

6.56


5 12 19 26 2 9 16 23 30 6

December January February

13 20 27

Figure A3-A


5.20

5.25

5.30

5.35

5.40

5.45

5.50

5.55

Mar 1997 Target Mar Average Target

20 27 3 10 17 24 3 10 17 24

February March

31

Figure A3-B

JULY/AUGUST 2002 91



5.7

5.8

5.9

6.0

6.1

6.2

6.3

6.4

6.5

6.6

May 2000 Target May Average Target

20 27 3 10 17 24 1 8 15 22

April May

29

Figure A3-E


5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6


8 15 22 29 5 12 19 26

January February

Figure A3-F


3.9

4.0

4.1

4.2

4.3

4.4

4.5

4.6

May 2001 Target May Average Target

23 30 7 14 21 28

May

Figure A3-G

92 JULY/AUGUST 2002



8.00

8.25

8.50

8.75

9.00

9.25


Dec Average Target

7 14 21 28 5 12 19 26 2

November December

Figure A4-A


8.6

8.8

9.0

9.2

9.4

9.6

9.8

10.0

10.2

Feb 1989 Mar 1989 Apr 1989 Target

Feb Average Target

19 26 2 9 16 23 30 6 20

January February

13 27

Figure A4-B

Funds Futures for June 1989 FOMC Event

8.96

9.12

9.28

9.44

9.60

9.76

9.92

Jun 1989 Jul 1989 Aug 1989 Target

Jun Average Target

1 8 15 22 29 5 12 19

May June

26

Figure A4-C

JULY/AUGUST 2002 93


Funds Futures for October 1990 FOMC Event

7.70

7.75

7.80

7.85

7.90

7.95

8.00

8.05

8.10

8.15

Oct 1990 Nov 1990 Dec 1990 Target

Oct Average Target

3 10 17 24 1 8 15 22

September October

29

Figure A4-D


5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9


Sep Average Target

5 12 19 26 2 9 16 23

August September

30

Figure A4-E

94 JULY/AUGUST 2002


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